Who Pays for Student Aid?

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There’s a lot of money in student aid, and the State of Iowa is trying to figure out who gets to spend it and on which students.

The state’s Board of Regents, which oversees Iowa’s three public universities -- the University of Iowa, Iowa State University, and the University of Northern Iowa -- created a committee Wednesday and charged it with developing a five-year plan that would seek to eliminate the use of tuition revenue for financial aid.

The idea of using tuition revenue for financial aid -- a common practice among colleges and universities, particularly private, nonprofit institutions -- has recently become controversial at public universities. Over the past few months, policy makers in several states have questioned the use of money generated by tuition payments to fund aid, saying it places an unfair burden on middle-class students because they may end up subsidizing other students, and have proposed various means of restricting the use of tuition dollars.

Arizona lawmakers proposed requiring all students to pay roughly $2,000 toward their education, regardless of need, an amount that could not be covered by institutional aid. Virginia Gov. Bob McDonnell proposed a cap on the percentage of tuition revenue colleges could use for financial aid. University of North Carolina system board members proposed a similar cap, and when that policy did not garner support, they proposed a tax break for families that pay tuition and do not receive aid equal to the amount that is used to fund other students.

While those initiatives stalled, the Iowa board is moving forward on its plan to significantly reduce how much the state's universities spend on financial aid, thereby reducing the amount that some students pay to support others. The largest component of the proposal would be to ask the legislature create a need-based state grant to cover the amount of tuition revenue the universities currently spend on in-state undergraduate students, which totaled about $35 million last year. While the state has some programs in place to provide aid for needy students, it is the only state that lacks a broad state-aid program. The board is also asking university fund-raising foundations to increase what they raise and spend toward merit aid to cover about $7.6 million that was doled out last year to in-state students.

Whether state lawmakers agree to the proposal, and whether the foundations are able to raise the necessary funds, are logistical challenges that show why efforts to move away from such a system have stalled in other states. But the biggest question might be how the state tackles the other $102 million in institutional subsidies that go to graduate and non-resident students. While calling for an end to the use of tuition as aid, the resolution adopted Wednesday does not address those students, which raises serious questions about whether Iowa plans to continue to fund aid for them at the same level.

The proposed policy change also raises two big questions about financial aid. The first is who should shoulder the burden of providing aid for needy public university students. While taxpayers historically carried that burden through state grant programs and state appropriations, which kept tuition prices low, the burden is increasingly shifting to students who don’t require financial aid.

The other major issue is who gets to decide which students receive aid, the institution or the state. “The big question here is who makes the decisions about who gets the money,” said Sandy Baum, a senior fellow at the George Washington University Graduate School of Education and Human Development, who gave a presentation to the Iowa board in March about financial aid policies. “If it is a tuition set-aside, and the universities use a certain percentage to give financial aid, then the institution has the discretion. If it is a state grant program, then the state decides whether each student qualifies for aid.”

Tuition as Aid

Iowa universities have been using tuition to fund financial aid since the 1980s, and the regents have had a policy in place since 2004 that requires the universities to set aside at least 15 percent of their tuition revenue for financial aid.

For fiscal year 2011, the universities set aside 21.3 percent of their tuition revenues for financial aid, which totaled about $144 million and went to 25,583 students, or about 45 percent of the students enrolled.

Several states have policies like Iowa’s that require some amount of tuition to be used for financial aid. When seeking tuition hikes, administrators have often found it politically prudent to say that some of the increase will be set aside to fund financial aid. When the State University of New York System sought a $300 annual tuition increase for the next five years, Gov. Andrew Cuomo requested that needy students be held harmless. As a result, about 20 percent of last year’s increase was placed back into financial aid.

Administrators argue that the image of one student paying more in tuition to subsidize another isn’t entirely accurate, and that university budgets are more complicated than that. Because of state appropriations, no Iowa student pays the full cost of his or her education, even as appropriations have dropped and tuition prices have increased. While full tuition and fees at the University of Iowa are about $8,000 for Iowa residents, the university spent more than $18,000 per student on education and related expenses in 2009, according to the Delta Cost Project.

Because tuition and appropriations tend to get lumped together in the university budgeting process, since both are relatively unrestricted funds, which revenue stream is used for aid can be a matter of policy rather than necessity. Other public institutions might use a larger percentage of state appropriations to fund financial aid programs and not require tuition to be set aside. “Whether you have appropriations going to fund educational operations and subsidizing tuition or you have tuition partly funding financial aid, it’s almost totally arbitrary,” Baum said.

Gary Rhoades, a professor at the University of Arizona College of Education and former general secretary of the American Association of University Professors, said that the use of tuition revenue for financial aid purposes at public universities was a direct result of states' decision to pull back state support over the past few decades. "It all falls on whether the state is willing to maintain its level of financial aid, and the evidence is that they haven't," he said. "Historically, taxpayers don't want to pay for this. This means fewer lower-income and middle-class students going to college, which is exactly where there's growth in the 18-21 year old population."

The idea that some students are subsidizing others is politically unpopular at the moment, especially among conservatives. The Virginia governor and the chief sponsor of the Arizona measure were both Republicans. It was Republican lawmakers in Iowa this spring who called the tuition policy an unfair burden on middle-class families, initiating the current talks.

But it's not just Republicans who dislike these policies. Six of the nine Iowa board members were appointed by a Democratic governor. Board members said at Wednesday’s meeting that they had received e-mails from families asking them to immediately end the subsidies.

Texas has had a policy on the books for several years that requires the universities to spell out exactly how much of a family’s payment will go to other students’ financial aid, currently about $200. The Iowa board adopted a similar policy Wednesday, a move likely to generate further opposition to the current policy.

Shifting Aid

There are several ways the Iowa board could end the cross-subsidy of students. First, state lawmakers could simply prohibit the use of tuition revenue to fund financial aid, which would leave the universities and students in a difficult predicament with a significant amount of unmet need.

While such a policy would eliminate the burden on middle-class families and restrict the universities’ abilities to spend aid money how they see fit, the board does not seem likely to take that path. In response to calls to end the subsidy immediately, the board's president, Craig Lang, said that would would be “simply impossible,” since the universities rely on that money to keep tuition affordable for so many students. Such a change would probably result in numerous low-income students being unable to pay tuition.

A second option would be to increase state appropriations to the university in an amount equal to the financial aid currently funded through tuition. That would remove the political problem of taking some students’ money to pay for others’ education, but would still leave it up to universities to determine how the aid money is spent. But at a time when many the state is facing competing demands on its revenue from health care, pensions, and prisons, it might be unpractical to seek a roughly $150 million increase in appropriations.

A third option -- the one the board seems most likely to pursue -- is to create a state grant program that would be distributed on the basis of need. The current slate of state grant programs is relatively limited. One program, the All Iowa Opportunity, is generally awarded to students in TRIO programs and will total $2.2 million this coming year. The Iowa Grants program is awarded to the state's neediest students, but the maximum award is $1,000 a year, and the state only appropriated about $800,000 for the program this coming year. The bulk of the state's spending on financial aid, about $45.5 million, goes to students attending private institutions. Unlike other states, Iowa does not have a broad, need-based state grant program.

If lawmakers embrace the grant program, it would give the state more authority over how aid money is spent and shift a significant component of funding higher education back to taxpayers. The board said that, if such a policy is embraced, it could also lead to a decrease in tuition.

In addition to the grant program, the board has also proposed getting the university foundations to increase their contribution to help cover merit scholarships, which currently account for about $7.6 million of the aid budget.

But one major complication to the state grant program is that Iowa universities pull a large percentage of students from outside Iowa. Only 64 percent of the students enrolled in the regent-governed universities in fall 2011 were Iowa residents.

They also spend a large component of their aid dollars on those students. According to the regents’ report, roughly $58 million of the $100 million doled out to undergraduates went to out-of-state students. If lawmakers adopt the grant program, it is unlikely that they will be willing to use taxpayer dollars to fund a program that gives aid to non-resident students. The universities might be able to make up some of that through private giving, but that’s a lot to generate year in and year out.

The board has not explained how it would intend to make up for that lost aid money if it moves to a grant program, saying that it wanted to focus on Iowa residents first.